Market News and Analysis

Earnings season hits full speed with nearly a third of Dow Jones industrial average firms reporting, while UK inflation figures are due on Tuesday and the European Central Bank meets on Thursday.

UK inflation

Inflation figures from Britain will be closely watched on Tuesday as they offer more clues about where monetary policy is heading. Rising inflation has forced the Bank of England to consider hiking rates and at its last meeting policymakers were split 5-3 in favour of maintaining the base rate at the historic low of 0.25%.

In May the CPI rose to 2.9%, from 2.7% in April. This is already at the level the Bank had expected inflation to reach by the end of this year. Anything in excess of 3% would turn up the pressure on the Bank to look at a hike over the summer, although it is understood that the Monetary Policy Committee is still prepared to look through any overshoot on its 2% target as it is seen as a transitory effect from the weaker pound.

Recently some policymakers, in chorus with other central banks, have been stepping the hawkish rhetoric to prepare markets to expect a hike at some stage. Even governor Mark Carney has said he would favour some removal of stimulus if business investment and wages improve. Rising 2-year gilt yields and overnight lending rates used by banks indicate rates will rise by March.

The new hawkish pivot sent the pound above $1.30 to its strongest level in weeks. If inflation is seen to be accelerating this ought to make an interest rate rise this year more likely, which ought to support further strength in sterling. If it has slowed at all it would take the pressure off the Bank to raise rates and this would send the pound lower again.

ECB

The ECB has been at the heart of the hawkish tilt by central banks, spurring the euro to multi-month highs against the dollar in the process. Hints dropped by president Mario Draghi indicated he was preparing to call time on ultra-loose monetary policy, sparking a mini taper-tantrum in bonds and stocks. Markets bought the rumour that the ECB will consider some form of tapering this year.

Risks are no longer tilted to the downside; they are balanced. Pressures are now mildly reflationary rather than deflationary. Growth has been revised higher, but inflation is not expected to accelerate as quickly. Improving core inflation is a source of comfort, although headline rates remain weak.

A change in policy at this meeting is not expected. Instead traders will for more subtle shifts in language; for example removing the pledge to expand or extent QE if warranted.

Earnings season

Earnings season on Wall Street gets into full swing this week almost one third of Dow components are set to report Q2 numbers.

Goldman Sachs (GS) is the biggest of the lot and should take its cue from the earlier bank earnings last week. International Business Machines (IBM), General Electric (GE), Johnson & Johnson (JNJ), UnitedHealth Group (UNH), American Express (AXP), Travelers (TRV), and Visa (V) are some of the other major listed companies on the Dow industrials to release earnings this week.

Netflix (NFLX) is the main FANG stock to report and will be closely scrutinised following the sell-off in tech stocks last month.

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